How to Calculate Present Value of a Bond

What is a bond

A bond is a financial instrument that is issued for a specific period with the purpose of borrowing money. When the bond is issued, it promises the holder, to pay a fixed sum of interest based on the predefined interest rate (coupon rate) at specified dates, usually, semi-annually, annually,etc. until it matures and it repays the principle amount at the maturity.

Present Value of a Bond

Present value is an alternative bond valuation method that calculates the current worth of the stream of future cash flows at a given rate of return. Cash flows on a bond are fairly certain. So, the present value of a bond is the value equal to the discounted interest payments (interest inflows) and the discounted redemption value of the face value of the bond certificate. These cash flows will be discounted based on the interest rate prevailing in the market at a particular instant.

Calculate present value of a bond:

Step 1: Calculate Present Value of the Interest Payments

Present value of the interest payments can be calculated using following formula where,

C = Coupon rate of the bond
F = Face value of the bond
R = Market
t = Number of time periods occurring until the maturity of the bond

calculate present value of a bond 01

Step 2: Calculate Present Value of the Face Value of the Bond

This refers to the maturity value of the bond, which can be calculated using the following formula.

calculate present value of a bond 02-1

Step 3: Calculate Present Value of Bond

 The total present value of the bond can be represented as,

Present Value of Bond Formula

Calculate Present Value of Bond 3

Calculate Present value of a bond – Example:

Following information is given with regard to the bond issue of ABC Company.

Face value of the bond – $ 2000
Maturity period of the bond – 5 years
Annual coupon rate – 9%
Market interest rate – 10%

Assuming that ABC Company pays annual coupon payments, calculate the present value of the bond.

calculate present value of a bond 04

Assuming that ABC Company pays its interest on semi-annual basis, calculate the present value of the bond.

Since the company pays the interest semi-annually, both coupon rate and market rate has to be adjusted per period. Therefore, there are 10 time periods to bond to be mature and coupon rate and interest rate will be 4.5% and 5% per period respectively.

How to calculate present value of a bond


A bond is a financial debt instrument. Calculating present value of a bond involves discounting coupon income based on the market interest rate plus discounting the face value of the bond after the maturity period. This value represents the current value of the future cash flows that will be generated by this instrument.

About the Author: admin

Leave a Comment

Related pages

sherbet lactoseenquiry and inquiry differencerestoration comedy definitionmalinois vs gsdstatic friction definitiondifference between anaerobic respiration and aerobic respirationwhat is expressivity in geneticsrms vs peak to peak voltagemonomers and polymers definitionparamagnetic and diamagneticpurpose of echocardiogramdefine kinetic frictionmolecular formula for methyl alcoholbrandy cognac differencesituational irony macbethsynonyms dumbconfectionery definitioncharacteristics of self pollinationtypes of agnosticsundamped vibrationprefix suffix and affixexamples of totipotent stem cellsdefinition of double covalent bondattributive and predicativeis laser light monochromaticdefinition of literary naturalismwhat is the difference between fox and wolfis alumni singular or pluralimagery gustatorymonocot seeds examplescoordinating subordinating conjunctionsclassical and operant learningprokaryotes and eukaryotes differencesexternal respirationwhat is difference between transverse and longitudinal wavesexamples of assimilation in infantsschlerenchymacurriculum syllabus differenceexplain the difference between haploid and diploid cellsspinal block vs epiduralatp molar massmodern periodic law wikipediabacterial jock itchwhat does literary device foreshadowing meanrolex identificationheterogeneous substance definitionthe difference between colloids and suspensionsdistinguish between electrolysis and electrophoresisforms of prepositionwhat is an enjambment in poetryeatable or edibleexample of enculturationwhat is the difference between goose and duckis quinoa better than couscouswhat is the difference between an atheist and an agnosticexample of external rhymedifference between doves and pigeonsdifference between labradorsribose formulaconcrete vs abstract nounhyphen dash differencewhat is subconscious mind and conscious mindfondness definitioncontrast covalent and ionic bondswhat is the difference between thrombosis and embolismis maltose a sugardifference between swan and duckwhat is the difference between an atheist and an agnostictypes of stem cells totipotent pluripotent multipotentelk moose cariboudifference between stupid and foolishboiling point petroleum etherexamples of a static charactertypes of formal and informal lettershypersomnia narcolepsythymine definitionprohibited meaning in urdu